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December 06, 2012

UK to Make 'Short Work' of Phase III Emissions Trading System Regulations



As part of the Red Tape Challenge running in the United Kingdom from April 2011 through April 2013—an effort to reduce the number  and complexity of laws on the books—the Department of Energy and Climate Change has provided Parliament with a single regulatory instrument for Phase III of the European Union Emissions Trading System (EU ETS). The solitary plan document would replace 13 previous sets of EU ETS regulations when Phase III becomes effective in January and continues for the next eight years, until December 2020.

What It Is

The EU Emissions Trading System is a cornerstone of the European Union's initiative to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively. The first and biggest international scheme for the trading of greenhouse gas emission allowances, the ETS operates in 30 countries—including the 27 EU member states, as well as Iceland, Liechtenstein and Norway. It covers CO2 emissions not only from power stations, combustion plants, oil refineries and iron and steel works, but also from factories making cement, glass, lime, bricks, ceramics, pulp, paper and board.

At the heart of the EU ETS is the common trading “currency” of emission allowances. One allowance gives the right to emit one ton of CO2. Member states currently are required to draw up national allocation plans for each trading period—assigning specific allowances to every installation annually. Decisions on the allocations are made public.

At the end of each year every eligible company must surrender enough allowances to cover all of its emissions; otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs, or can sell them to another business.

To date, most allowances have been granted free-of-charge. The limit on the total number of allowances available ensures that they have a value. The number of allowances is being reduced over time, along with total emissions: In 2020, emissions are envisioned to be 21 percent lower than they were when the program started in 2005.

The aviation sector was brought into the system at the start of 2012; however, in November 2012 the European Commission made a proposal to defer application of the scheme to flights operated to and from countries outside the ETS in 2012, in order to provide more time for a global agreement addressing aviation emissions to be reached. This has become a moot point in the United States, where just a few days later, on November 27, President Barack Obama quietly signed legislation shielding U.S. airlines from paying for each ton of carbon their planes emit flying into

and out of Europe.

Changes in 2013

The EU ETS will be further expanded to the petrochemicals, ammonia and aluminum industries and to additional gases in 2013, when the third trading period starts.

At the same time a series of important changes to the way the EU ETS works will take effect to strengthen the system. In particular, there will be a single, EU-wide cap on emissions; and auctioning will become the default method for allocating allowances, progressively replacing free allocation. This change reflects the fact that auctioning creates a stronger incentive for businesses to take early action to reduce emissions, complies better with the “polluter pays” principle; and will increase the efficiency, transparency and simplicity of the EU ETS.

The power generation sector will, in principle, have to buy all of its allowances starting next year, since experience shows that power generators have been able to pass on the national cost of emission allowances to their customers, even when they are free. However, under certain conditions, some member states will have the option of deviating from the rule temporarily for existing power plants. They will be able to grant such plants up to 70 percent of their allowances free-of-charge in 2013, but this proportion will be decreased progressively through 2020.

Organizations that capture, transport and geologically store greenhouse gases also will have to buy all of their allowances starting in 2013, but will not have to surrender allowances for the emissions stored.

In addition, “small emitters” and hospitals have been given the opportunity to opt-out of the EU ETS, starting in 2013. Instead, they will participate in “a lighter touch alternative scheme, which will address the disproportionately higher administrative costs faced by these installations.”

What’s more, the UK will move to a kinder, gentler enforcement system that imposes only civil, not criminal, sanctions.

UK Minister of State for Climate Change Greg Barker commented, “By simplifying the regulations for Phase III of EU ETS, we will save companies money and time, while still allowing them to meet environmental goals. “This will mean that smaller businesses, [which] experience higher costs from complying with the current regulations, [and] that choose to, will also be opted out of the system from 2013.”

Under the UK Red Tape Challenge, 154 deregulatory changes already have been implemented, with 76 more to come by December 2012.

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Edited by Brooke Neuman

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